Market Wrap

Psycho Market

by Jim Brown

The futures recovered from a 16 point drop overnight and the Dow rallied 283 points at the open. By 10:30 the move was over, and the index declined to the low of +31 by 4:30. When the indexes did not turn negative the dip was bought into the close and on paper it looked like a successful day. Unfortunately, the volume was terrible.

The bottom line is that the Dow gave back 250 points of gains in a predominantly negative session. The Nasdaq gave back 89 points over the same period. That is far from bullish despite the positive close, which was clearly a buy program.

It was a miracle the market was up at all after some ugly economic reports. The housing starts for February declined from 1.273 million to 1.162 million and below estimates for 1.201 million. That is nearly a 9% drop. There were some weather issues in February that could have caused the decline, but they were also -9.9% below February 2018 levels. Single family starts fell -17.0% but multifamily starts rose 17.8%. Permits, a predictor of future starts, declined -1.6% with multifamily declining -4.2% and single-family permits were flat.

On the positive side the upward revisions for the prior two months were larger than the February decline. Permits not yet started declined -1.5% to 195,000 but still 21.9% over February last year.

Consumer confidence for March declined from 131.4 to 124.1 and nearly erased the gains in February. The present conditions component collapsed from 172.8 to 160.6 and the expectations component declined from 103.8 to 99.8.

Analysts were expecting a rise in the headline number to 132.0. There were several components that weakened. Those respondents who believe business conditions are good declined from 40.6% to 33.4%. More people said jobs were harder to find and harder to get. The labor market component declined from 34.0 to 28.3. Those expecting business conditions to improve declined from 19.6% to 17.7%. Buying plans improved with 14.1% considering a new car, up from 12.4% and home buyers rose from 5.4% to 6.1% because this is buying season.

The Richmond Fed Manufacturing Survey for March declined from 16.0 to 10.0. While that is still overall positive, analysts were disappointed to see a decline after the 18-point rebound in February. New orders declined from 19 to 9 and backorders declined from -7 to -13. The only positive component was a jump in the employment component from 15 to 23. That is the largest jump since August. The gap between new orders and production declined from +5 to -8. Demand has weakened with the three-month average of shipments and new orders at the lowest level since 2016. As you can tell by the chart below this is a volatile report and it is mostly ignored because of noise.

After the bell the weekly API crude inventory report showed a rise of 1.9 million barrels of oil. Gasoline inventories fell -3.5 million barrels and distillates declined -4.3 million barrels. Refined products will continue to decline as winter blends are drained in preparation for production of summer blend fuels.

Crude prices are struggling to more over $60. We have been there five times over the last six days and cannot seem to push through to start a run towards $65. Memorial Day is normally the peak for gasoline prices and oil peaks in the June/July period but not much higher than the Memorial Day prices.

There is nothing of importance on the calendar for Wednesday. The Kansas Fed survey and GDP on Thursday are the next most important for the market and neither are expected to be market movers.

Lululemon, PayChex, Lennar and PVH Corp are the only earnings reports of interest on Wednesday.

After the bell on Tuesday, KB Home reported earnings of 31 cents that beat estimates for 27 cents. Unfortunately, revenue of $811.5 million missed estimates for $829.3 million. During the quarter they prepaid $230 million in convertible notes, which also significantly reduced the share count. Since they instituted their "Returns Focused Growth Plan" in 2016 they have prepaid more than $800 million in debt. New orders totaled 2,675 worth $1.02 billion. The cancellation rate remained flat at 20%. The backlog was 4,631 homes worth $1.66 billion. They ended the quarter with net liquidity of $978.5 million. They have no borrowings under their unsecured credit facility. Inventories rose $100.9 million to $3.68 billion. The number of lots owned or controlled rose to 57,744.

Carnival (CCL) sunk once again. Carnival Corp shares have a bad habit of sinking after their earnings report. They beat on earnings with 49 cents compared to estimates for 44 cents. Revenue of $4.67 billion easily beat estimates for $4.31 billion. For the current quarter they guided for earnings of 56-60 cents with fuel costs and the strong dollar knocking 8 cents off the year ago quarter. Analysts were expecting 72 cents. For the full year they guided for $4.35-$4.55 and analysts were expecting $4.76. The company blamed the weak economy in Europe, the impending Brexit problem and the rising fuel costs and strong dollar, which are expected to last through the summer.

Business is booming. They are preparing to launch their newest ship, the Mardi Gras, now booking for 2020. They already have 55,000 booked passengers. This ship is the first with six themed "zones" similar to a Six Flags where each section has a different theme including the French Quarter, The Lido, The La Plaza, Grand Central, Summer Landing and the ultimate playground. The ship has a complete roller coaster that traverses the top deck of the ship.

Sales are great as evidenced by the $360 million revenue beat but they always seem to have trouble with the guidance. The three gaps on the chart below were all post earnings.

McCormick (MKC) reported earnings of $1.12 that beat estimates for $1.04. Revenue of $1.232 billion missed estimates for $1.237 billion. Consumer sales of $744.9 million missed estimates for $75.35 million. Flavor sales rose to $486.6 million and beat estimates for $478.3 million. They guided for the full year for $5.17-$5.27 and analysts were expecting $5.23. They guided for revenue growth of 1-3% and analysts were expecting 0.9%. Shares posted a minor gain, but they were already up strongly from the January low.

Bed Bath & Beyond (BBBY) spiked 22% after the WSJ reported activist investors are preparing to launch a proxy fight to replace the entire board. The activist funds control 5% of the shares so they have an uphill battle. They claim the company has failed to adapt as consumers shop more online rather than at brick and mortar stores. They want the company to better select its merchandise to fit customer shopping patterns. Raymond James upgraded the stock to strong buy from market perform saying the company has merit from a buyout perspective and an activist perspective.

The Trade Desk (TTD) officially opened its ad platform to China. Through a handful of partnerships they are allowing customers to place ads with quality networks in China. The upgrade from beta status is an important move and they expect China to be a high growth area for them in 2019. The 1.3 billion consumers who are used to shopping online makes it an important market. China accounts for 20% of the world's internet users. Baidu, Alibaba and Tencent are now part of the Trade Desk platform. Shares fell $10 in a sell the news trade. This expansion had been expected.

Apple (AAPL) shares traded up $4 at the open and then crashed back to lose $2 at the close. The problem stems from the disappointing product announcement on Monday and a court ruling they infringed a Qualcomm patent and may be restricted from importing certain iPhone models into the US.

The ruling from the International Trade Commission went in Qualcomm's favor with the panel leaning in the direction of blocking imports of the iPhone 7, 8 and X because of patent violations. A prior ruling from the ITC went in Apple's favor. Qualcomm has already won a similar ruling in China and Germany with a block on sales, but it is not currently being enforced in China. There are multiple cases in other jurisdictions and multiple cases on appeal.

A bigger issue for Apple was the strange product announcement on Monday. They announced a big new streaming service and trotted out numerous stars that would be staring in their original programming but had no trailers or show information or even prices for the service. They announced a new gaming service to compete with Google's Stadia but gave no details and no prices. They announced a new credit card called Apple Card and touted how it would be a lifestyle card with significant discounts and cash back programs but gave no real details other than cash back percentages on purchases of Apple products. They announced the Apple News service for $9.95 per month and bragged about all the major publications that would be included. The Wall Street Journal was one of them. However, when people subscribed, they found that only a couple articles were available from the WSJ and they did not include business news. There was a loud uproar about a bait and switch in marketing. They flashed the big names, but the content was minimal and non-prime.

Analysts were tripping all over themselves to understand why Apple would have a big splashy product announcement event and then not provide any details. Multiple analysts said it appeared to be rushed and thrown together at the last minute. Was Apple trying to rush to beat the headlines on the Qualcomm court victory? Maybe but I think it was more than that.

I think Apple has been announcing products as fast as they can because they are trying to deflect from their upcoming earnings. The earnings are projected to be May 7th, but Apple may be trying to build up some positive press before they warn. If they are going to cut guidance it would happen over the next couple of weeks. Could they be announcing every new product in their bag of tricks to try and boost sentiment ahead of an earnings warning? That is entirely possible. That is the only excuse I can come up with to explain the multiple mistakes in Monday's product announcements. Apple rarely makes mistakes so there is something driving their hastily produced announcement disaster.

Analysts were seriously concerned about the microscopic yield curve inversion on Friday between the 3-month and 10-year treasuries. First, the inversion that actually counts is between the 2-year and 10-year and we are not close. Ignore all the chatter until/if it actually happens.

Secondly, analysts were panicked that the 10-year yield fell to 2.41%. Guess what, it is still at 2.41% for the last two days and the market has been positive.

Third. Today the panic was the Fed Funds futures showing the potential for a rate CUT in September rather than a future rate hike sometime in early 2020. Yes, the futures are showing a 52% chance of a cut in September. Is this going to happen? Not hardly. We are a very long way from a rate cut unless Brexit goes very badly and somebody declares war on us.

All the economic factors have softened but we are still in growth mode. Expecting a Fed rate cut in this environment is just not realistic. The market shook off all the morning rumors and ended the day positive.

Markets

The markets opened strongly positive with 8:1 advancers over decliners on the NYSE. That slipped to 3:1 by the close and only because of the closing buy program or it would have been worse. The S&P-500 was 4:1 and Nasdaq 2:1. Those are respectable numbers, but they came on the lowest volume since February 11th at 6.5 billion shares.

The S&P is still fighting resistance at 2,815 as it has since mid-October. We traded over that level last week but fell back on Friday. We closed 3 points over at the bell, but that resistance is still in play.

We do have an impending "golden cross" possibly later this week when the 50-day crosses back over the 200-day average. In theory that is bullish. However, given the angle of ascent on the 50-day the S&P could drop 100 points tomorrow and the cross would still occur. That means any fund manager that follows that signal is already buying stock. They are not going to wait until the actual cross with the S&P 50 points higher. At least I would not wait because the cross is inevitable.

The next resistance challenge is 2,854 and the high close from last week. Once there we are less than 3% from a new high. The challenge is the new headlines about global weakness, Brexit disaster and breakdown in China talks. Those topics are not new but the recent flurry of headlines are taking a new tact.

The Dow was dragged down by Apple and UnitedHealth. UNH was hit after the DOJ agreed with a Texas court that the ACA (Obamacare) is unconstitutional. The agreement essentially suggests the entire law could be struck down. Healthcare stocks were all crashing with losses from 3% to 10%. Given the split in the House and Senate, the law is not likely to be changed but a Jefferies analyst said there was significantly more headline risk for insurers because of clerical changes that could be made to various portions of the law.

Boeing could be a drag on the Dow at the open tomorrow. After the bell a 737 Max being ferried to a holding area in the Mojave, had to turn around and make an emergency landing because of an engine problem. This was not related to the problems that caused the two crashes, but it was a 737 Max and that was the headline making the rounds. Boeing shares were down -$10 in afterhours.

The Dow is struggling to make it back to the 26,000 level and these types of single stock problems are going to continue to hold it back. Resistance remains 26,191.

The Nasdaq remains the best performing index. Prior resistance at 7,650 acted as support and the index posted a decent 53-point gain. The index is about 5% from a new high at 8,109. Apple, Netflix and Google were the big losers. Netflix is down on worries about the surge in streaming services even though Apple is not going to be a competitor for a very long time.

The Russell 2000 is the worst looking chart, but it posted the biggest gain today at 1%. This is a lower low right at critical support of 1,500 and a lower high at strong resistance at 1,566. Sentiment needs to improve a LOT for the Russell to push through 1,600.

Futures are mildly positive but that could change in a heartbeat. There are no economics of note on Wednesday and earnings are minimal. Investors will be left to make their own decisions about market direction and without a major catalyst the market is likely to continue to be volatile intraday. We are close enough to the prior highs for that magnetic force to apply but we are still far enough away that the slightest bit of bad news could sour sentiment. I would be cautious until the S&P moves back towards its high from last week. That would be my sentiment indicator. I do not trust the Russell at this time.

New Option Plays

Still Cautious

by Jim Brown

After the intraday decline of -250 points, investors remain cautious about the market. I believe they want to buy stocks but every rally we have had over the last six days has been sold. The intraday volatility is increasing and that is a symptom of market tops and bottoms. Resistance remains firm and we are working on a pattern of lower highs. At this point patience is a virtue.

New positions are only added on Wednesday and Saturday except in special circumstances. NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays

NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays

In Play Updates and Reviews

Choppy but Positive

by Jim Brown

The morning started off with a bang and the Dow up +283 but that was the high for the day. The Dow declined to only +28 at 2:30 but the dip was bought on low volume at the close. The opening spike lost traction very quickly with the high at 10:30 and the decline steady the rest of the day. While the markets ended positive the internals were lackluster and quite a few stocks declined. There is still a lot of uncertainty in the market.

Current Portfolio

Stop Loss Updates

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Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.